In this case, the Newfoundland & Labrador Court of Appeal
considered whether a receiver is conflicted if it previously
assisted the debtor in financial restructuring efforts.

Background

The debtors, Wabush Hotel Limited and two related companies,
received a large business loan from the Business Development Bank
of Canada ("BDC") in July 2014. When it became evident
that the debtors were experiencing financial difficulty in 2015,
PricewaterhouseCoopers Inc. ("PWC") was retained, at
BDC's request, to review their financial position and to assist
them in developing a business plan. In relation to this mandate,
PWC signed an engagement letter with the debtors on 23 December
2015 (the "Engagement Agreement").

Once PWC obtained access to and reviewed the debtors'
financial and business records, it was apparent that their business
operations were unsustainable. This finding was reported to BDC.
After the debtors then failed to meet their obligations for three
consecutive months, BDC sent demands for payment and notices of
intention to enforce security in March 2016. The debtors failed to
make any payments on the debt in response.

The debtors owed BDC an aggregate amount of $7.2 million,
including interest, by the time that BDC applied for an order
pursuant to s. 243 of the Bankruptcy and Insolvency Act, RSC 1985,
c. B-3 ("BIA"), for the court appointment of a receiver
to manage the assets, undertakings, and property of the debtors.
The receivership order was granted in June 2016 and PWC was named
as the receiver. The form of order granted was based on the model
receivership order used in Atlantic Canada.

The debtors appealed the court appointment of the receiver. The
issues on appeal were (i) whether PWC ought to have been precluded
from acting as receiver due to conflict of interest; and (ii)
whether the form of receivership order was appropriate.

Decision

At the appeal hearing, counsel for the debtors characterized the
appointment of PWC as receiver as a "clear conflict of
interest" and a betrayal, arguing that PWC could not act as
their principle's "best friend" one day, then turn
around and take over his businesses on behalf of their creditors
the next.

The Court of Appeal determined that no conflict of interest
arose from PWC's previous review of the debtors' business
operation which would disqualify it from subsequently acting as
court appointed receiver. In so holding, the Court observed that
the debtors' objection was inconsistent with the express terms
of the Engagement Agreement, including a provision located directly
above the signature line which stated as follows:

The undersigned further understands that PricewaterhouseCoopers
Inc. is not precluded from accepting any other mandate in respect
of the Company, including but not limited to appointments under
statute or by court order, should circumstances so warrant.

The Court accepted BDC's argument that, having known about
and consented to the potential possibility that PWC could be
appointed receiver by virtue of the above statement, the debtors
could not now claim that PWC should be discharged due to conflict
of interest.

Further support for this position was found in 620320
Saskatchewan Ltd. v. PricewaterhouseCoopers Inc., 2003 SKQB 175,
where the question of whether a receiver was in a conflict due to
its previous monitor role with the same debtor had also been
raised, notwithstanding a provision similar to one above having
been contained in the engagement letter governing the monitor
arrangement. The debtor's objection in that case was likewise
dismissed, with the Registrar concluding at para 4 as follows:

I mention the point relating to PWC as both a
"monitor" and receiver to show that it was specifically
recognized that there would be no conflict if PWC was appointed
receiver. In fact, even without the acknowledgement in the
engagement letter, it would appear logical and cost effective to
ensure that the monitor would be the receiver if that eventuality
occurred. This would avoid the potential for duplication and
increased fees by the appointment of an entity that had not already
become familiar with the debtor companies through the previous work
carried out as a monitor.

With respect to the second issue, the Court declined to revisit
the form of receivership order used. The Court agreed with
BDC's submission that neither a realization plan or a claims
plan would have been appropriate, given that the assets of the
three related companies were all located in Labrador West and
financing for the debtors was provided principally by BDC and Bank
of Montreal. The Court accepted that this situation was
distinguishable from the case of Hickman Equipment (1985)
Ltd.(Receivership), Re. (2004), 241 Nfld. & P.E.I.R. 294, a
complex bankruptcy proceeding where a claims plan was developed by
the receiver in conjunction with the bankruptcy court.

Costs on the appeal were awarded to BDC.

Takeaways

No conflict of interest identified for accounting firm
designated to act as receiver after previously being engaged by
secured creditor to review and recommend restructuring for indebted
hotel companies.

Model Order appropriate for use in uncomplicated
receivership.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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In a previous post, we discussed areas of exposure and avenues for recourse for directors of insolvent companies. In this post, we look at how directors' legally prescribed duties may shift during insolvency.

The Supreme Court of British Columbia made an order that the funds in a Registered Disability Savings Plan (RDSP) could not be seized by the Trustee-in-Bankruptcy of the bankrupt beneficiary to satisfy the claims of creditors.

On March 25, 2010, Toronto Senator Art Eggleton tabled Bill S-216 which, if proclaimed in force, would amend the Bankruptcy and Insolvency Act (the "BIA") and the Companies’ Creditors Arrangement Act (the "CCAA") to protect employees on long-term disability ("LTD") by granting super priority status to long term disability benefits and health related benefits that are to be paid to disability plan beneficiaries in the context of insolvency proceedings.

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